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Example of GDP Calculation

GDP calculation is based on a basic formula: private consumption + gross investment + government spending + (exports - imports)

This calculation is translated into a formula as GDP = C + Inv + G + (eX - iM)

The basic unadjusted result is known as 'nominal GDP', which is a raw data figure. However, if inflation or deflation aren't included, the figure is inaccurate in terms of measuring actual GDP performance. If, for example, a country's GDP increases from 1 trillion to 100 trillion in one year, it's more likely to reflect rampaging inflation, and the fact that a potato now costs $10, than a sparkling economic performance, and a drastic devaluation of the currency. So the adjustment, also known as a GDP deflator, is used to create a 'Constant GDP', which is an accurate measure of performance.

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